New websites gifted.com, mybag.co.uk and washbag.com have been launched in the past three months. The move is a bold departure for the Cheshire-based business, which has grown into Britain's third-largest online DVD and CD retailer in the six years since it was set up by Matthew Moulding and John Gallemore, former executives within John Caudwell's mobile phone empire.

By basing much of certain operations in the Channel Islands, the Hut Group exploits a loophole in 27-year-old European tax rules that exempts from VAT any imports below £18 in value arriving from outside the EU.

Offering VAT-free prices on goods other than CDs and DVDs would put the Hut Group on a collision course with the Treasury, which has for years regarded the Channel Islands dodge as a headache but a containable problem. Official estimates suggest the trade cost the taxpayer £110m in 2008 and is on the increase.

With VAT scheduled to rise from 17.5% to 20% at the end of the year, the appeal of tax-free internet sales is expected to become stronger than ever.

The Hut Group declined to comment. Neither its websites nor its advertising make reference to VAT avoidance, telling customers "all prices include VAT (where applicable)". Nor does it regard its explosive growth – turnover has increased by more than 150% every year since it started – to be down to tax dodging. "I don't think of the VAT as being an advantage in the slightest," Moulding has told the Observerin the past. "The reason for that is all online retailers of such cheap products, everyone does it."

The Hut Group announced in April that it had raised £14m through a "pre-IPO placing", attracting funds from Artemis, Bill Currie, founder of the high street perfume chain Fragrance Shop, former Matalan boss Angus Munro, and venture capital firm Balderton. It is now looking at acquisitions targets "to further broaden the product offering".

The Treasury has been said to be keeping Channel Islands VAT-free trade under "close review" and the new government has yet to look at the matter. Data from Kantar market research suggests one in three music CD purchases in the run-up to last Christmas were at VAT-free prices via the internet. Among those offering the customers the internet tax dodge are Tesco, HMV Amazon and Play.com.

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